Expecting Money to Buy Happiness, and Trying to Beat the Market, Can Hurt You

There's ample evidence to support both statements. Intellectually, we may even accept their truth. And yet we're confident we'll be much happier if we get a pay raise. Meanwhile, we are holding off on our next stock purchase, because we're sure prices will be lower a month from now.

What's going on here? Let's start with the evidence. Consider the connection between money and happiness. According to the General Social Survey, conducted by Chicago's National Opinion Research Center, 32.9% of U.S. residents said they were very happy in 2012, barely higher than the 29.7% who described themselves that way in 1972.

Yet, over that 40-year stretch, U.S. per capita disposable income more than doubled, even after adjusting for inflation.

It seems we quickly adapt to material improvements in our lives, so even the wealthy can find themselves dissatisfied and hankering for more.

What about beating the market? Logic tells us the odds are slim.

Before investment costs, investors collectively earn the market's performance. After costs, most of us must inevitably lag behind the market.

And, no, hiring a professional money manager probably won't help. Check out the regular survey of mutual-fund performance from S&PDow Jones Indices, a part of McGraw Hill Financial. For example, the survey analyzes U.S. stock funds in nine style categories based on the size of the companies that the funds buy and whether they use a growth, value or blended investment style.

Result? Over the five years through 2013, a majority of stock funds in all nine style categories lagged behind their benchmark index, with the failure rate ranging from 61% to 86%.

Despite such evidence, many folks continue to act as though money will buy happiness and as though they have a good shot at beating the market.

Problem is, neither behavior is good for our finances. Our belief that money buys happiness can prompt us to spend too much and save too little. Our hunger for market-beating returns can hurt our portfolio's performance, as we incur high investment costs and take unnecessary risk.

So why do we persist? "It's the same competitive juices that are driving both of them," reckons Meir Statman, author of "What Investors Really Want" and a finance professor at Santa Clara University in Santa Clara, Calif. "It becomes more about status than about meeting your needs."

At issue may be the so-called hedonic treadmill. We strive for the next promotion and the new car, sure they'll deliver a big boost to our happiness.

But instead, we quickly become dissatisfied and soon we're striving after something else.

"Status seekers are on the hedonic treadmill, always feeling behind, even when they have billions," Prof. Statman says. "The same competitiveness afflicts those who insist on beating the market, striving to be No. 1."

Much of the blame may lie with the instincts we inherited from our hunter-gatherer ancestors. Just as they survived because they relentlessly sought food and other necessities, so we, too, are hard-wired to want more and more.

"Even if part of our brain can figure out the game, we still love to play," notes Terry Burnham, co-author of "Mean Genes" and a finance professor at Chapman University in Orange, Calif. "More money may make us happier. But we misjudge by orders of magnitude how much happier it will make us."

Similarly, our hunter-gatherer brains find it tough to make sense of modern financial markets. Most of the time, whether it's dealing with traffic or dealing with our father-in-law, we can observe the situation and quickly figure out how to navigate it.

But the skills that help us succeed in other areas of our lives, such as looking for patterns, working hard, minimizing the chances of loss and mimicking the behavior of others, don't necessarily pay off in the financial markets.

Market patterns often turn out to be random price movements, working hard can mean excessive trading costs, minimizing losses can lead us to avoid stocks, and mimicking others can prompt us to buy overpriced growth companies.

Layered on top of this is our abundant self-confidence. That confidence can help us in our career and in social situations. But it can be a disaster in the financial markets, which are fiercely competitive.

"In every trade, there is an idiot," quips Prof. Statman. "What is it that I know that isn't known by others? There's a difference between playing tennis against a wall and playing tennis against Roger Federer."

The truth lies in between. Figure out your true needs and ways to meet them. Then figure out what small pleasures make you happy...plenty that don't require throwing a lot money around to try to impress people who don't care anyway...wildflowers along a woods path, a good lending library, a decent job, faith, friends and family...many more.

The problem with people is how much is enough. Many people in the bottom 80% spend (or consume) all their income on necessities and sometimes on things they want rather than need or even worse, buying on credit that exceeds their income. As their income increases, the more they consume. Smarter people determine their basic expenses and set aside the rest, not increasing their consumption as fast as their income increases. When we started making money that met our basic needs, that made us happy. At least 80% of all the future income increases in our lives went to savings, not increased consumption.

Money is like fertilizer. It is most useful when thoughtfully spread around. The joy excessive funds allow comes from being able to use the same to make life easier for others. When hoarding, there is never enough. When fertilizing, more always seems to appear.

"According to the General Social Survey,
conducted by Chicago's National Opinion Research Center, 32.9% of U.S.
residents said they were very happy in 2012, barely higher than the
29.7% who described themselves that way in 1972.

Yet, over that 40-year stretch, U.S. per capita disposable income more than doubled, even after adjusting for inflation."

Some increases in income are better than others - if you work in high end finance life is good. If you work in manufacturing, not so much.

This from Tyler Cowen in 2011

From
1947 to 1973 – a period of just 26 years – inflation-adjusted median
income in the United States more than doubled. But in the 31 years from
1973 to 2004, it rose only 22 percent. And, over the last decade, it
actually declined. -

1. Spending money may have diminishing returns but having more of it makes maintaining current levels of happiness easier and longer lived.

2. It's less a question of knowledge and more one of risk assessment variations. And I love the fact that if everyone agreed it was impossible to beat the market then everyone would buy index funds and there would be no market because no one would be buying stocks...

Many lucky people find happiness earning money but pretty much everyone finds happiness while spending it. Living in our homes, spending time with loved ones, driving our cars or raising children are all activities done while spending money. The specific conclusion I would draw is that people overvalue the amout of happiness social status and lording it over people brings. To the exten money allows you to partake in activities you find internally rewarding it will bring you happiness.

The second conclusion is that beating the market takes talet and resources and the industry is not structured to enabling the typical investor to acquire either one.

That the only goal fund managers have is that they only want to beat the other fund managers.

My investment goals don't include happiness. I invest so that I can retire comfortably, absent the grinding pain that is poverty.

Happiness is my son graduating and getting a job as an engineer after I put him through school. Happiness is my niece marrying a great guy. Happiness is being able to play that difficult passage and overcoming performance anxiety. Happiness is watching the kids and cousins frolic in the pool after I spend many hours toiling to make crystal clear water 85 degrees. Happiness is strolling through my neighborhood greeting neighbors. Happiness is stocking the local food pantry. Happiness is transporting my mom to church and back to assisted living. Happiness is helping her through her many doctor visits and coping with Alzheimers. Happiness is winning a competition or solving a problem at work.

Money isn't everything, but try paying the bills without it. Unless you are the Federal government, it just does not happen. As for happiness, it is most often in the pursuit of the goal, not the goal itself.

@Joe Thompson@tom johnson I
had a young female employee constantly moaning about lacking money. I sat her
down and did the math of her daily Starbucks fix over the span of two years.
Her eyes got wide. That was about it, because she didn't change the behavior.
So I bought Starbucks stock and have since made a good chunk of change. Still haven't
had one of their overpriced coffees, though. Hope she'll have 3 or 400
for me.

@JOHN DEBELLO@Joe Thompson@tom johnson I did a similar calculation of my son's Starbucks habit when he had a Summer job at my company. He quickly stopped the Starbucks and started drinking the free company coffee.

@mark whitton @JOHN DEBELLO @Joe Thompson @tom johnson As a friend and I did for a third friend's Bar (vodka) and some other "illicit" habits over 30 years. Assuming 75% equities he would have 1.3 Million...instead he declared bankruptcy a few years back. BTW he wouldn't change a thing.

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